http://decision.tcc-cci.gc.ca/site/tcc-cci/decisions/en/item/64568/index.do 
Karam v. The Queen[1] (November 4, 2013) is a now rare example of what used to be referred to as a “trading case”, i.e., was the transaction on income account or was it a capital transaction? These cases were extremely common in the decade or so after capital gains became taxable in Canada (January 1, 1972) but have become much less common over the years. I have to confess to a certain nostalgia in reading this decision.
From the beginning of the decision there were signs that the case would not go well for the taxpayer:
[1] The Appellant is a member of a limited partnership (the “Limited Partnership”) which purchased 350 acres of land between 1990 and 1995 in the City of Kanata (now part of the City of Ottawa). The Limited Partnership sold a portion of these lands, comprising 200 acres, in 2007. The 200 acres were referred to as the “Monarch Properties”. The primary issue before the Court is whether the substantial gain realized on the sale of the Monarch Properties is on account of income or capital.
[2] There is a secondary issue relating to an amount the Appellant received on the sale of the Monarch Properties. As the Respondent noted in her Reply, I will only need to consider this issue if I find the sale of the Monarch Properties was on account of capital.
[3] The Court heard from 22 witnesses. The witnesses testified over five full days, of which three days were taken up by the oral testimony of the Appellant. Twenty of the witnesses testified very briefly. The Appellant called all of the witnesses.
The Appellant, the Limited Partnership and the Lands
[4] The Appellant began practising as a real estate lawyer in 1973. Around this time, he began investing in numerous real estate ventures. In addition to the real estate venture at issue, he invested in the following:
– Beginning in the 1970’s and ending in the early 1980’s, a real estate development involving 100 acres of land that contained 27 estate lots.
– Between 1990 and 1998, a subdivision containing 126 lots.
– Beginning in June 2011, another subdivision venture.
[5] On April 27, 1990, 12 limited partners, including the Appellant, and a general partner formed the Limited Partnership. The general partner was 830289 Ontario Limited, a company controlled by the Appellant.
[6] A number of the limited partners testified. It is clear from this testimony that all of the limited partners either were related to the Appellant or were friends of the Appellant. The Minister of National Revenue (the “Minister”) has assessed all of the limited partners in respect of the sale of the Monarch Properties. The limited partners have chosen the Appellant to be the test case and have agreed to be bound by the final decision of the Courts in this appeal. This is not surprising since the Appellant, through the general partner, made all decisions with respect to the Monarch Properties. Further, the limited partners testified that they were not involved in any way with any lands held by the Limited Partnership, including the Monarch Properties.
[Footnotes omitted]
Thus the stage was set for the court’s review of the salient factors determining the nature of the taxpayer’s landholding activities:
[104] It is my view, which is based primarily on the objective evidence before me, that the Limited Partnership purchased the Monarch Properties with the intention of reselling the land at a profit once the land was included within the urban boundary. I have also concluded that the Limited Partnership sold the Monarch Properties in the course of its business of buying and selling land.
[105] My conclusion that the Limited Partnership was carrying on a business of buying and selling land is based upon its activities between 1990 and 2006, including the following:
– Between 1990 and 1995, the Limited Partnership acquired 350 acres of land either in or on the border of an expanding residential area. The area was subject to significant speculation.
– In 1994, the Limited Partnership retained a consortium of consultants to prepare a rezoning application.
– In 1996, within a year of purchasing all of the 350 acres, the Limited Partnership filed a rezoning application in an attempt to bring the Monarch Properties within the urban boundary. The detailed documents that were part of the application envisage the applicants building 2,200 residential homes on the Monarch Properties and a portion of the Neighbouring Properties for sale to third parties.
– In 1998 and 1999, the Limited Partnership sold two parcels of its land.
– Early in 2001, the Limited Partnership refiled its rezoning application.
– In 2003, the Limited Partnership appealed the rejection of its second rezoning application to the OMB.
– Sometime during 2003 and 2004, the Limited Partnership had the Calmar Properties rezoned to increase the allowed residential development on the lands.
– In November 2004, the Limited Partnership sold a 50% interest in the Calmar Properties and entered into a joint venture agreement with the purchaser of the 50% interest. The Limited Partnership agreed to sell the lands on a timely basis with as large a residential component as possible.
– In August 2005, the OMB issued a decision providing that the urban boundary should be extended to include the Monarch Properties.
– Between January and July 2006, the Limited Partnership sold a substantial portion of its 50% interest in the Calmar Properties.
– In December 2006, the Limited Partnership sold the Monarch Properties.
[106] In my view, these activities together evidence the carrying on of a business. During the relevant period, the Limited Partnership was engaged in a continuous operation whose purpose was the buying and selling of land at a profit.
Comment: The factual underpinning of this decision is far more extensive than I have set out but I do not think the reader would benefit much from a more discursive recounting of the reasons for judgment. In a nutshell it would seem that there was simply too much going on during the period of ownership of the property to persuade the court that it was a passive investment.
[1] 2013 TCC 354